Considerations in Naming a Trustee

A trust is created when the owner of property, called a grantor, transfers legal title to an individual, called the trustee. The trustee holds the asset for the benefit of a third person, called the beneficiary. The simplest example might be if a grandfather gave his watch to his son to hold for his grandson until the young boy reached a certain age. The son technically owns the watch, but he cannot do what he pleases with it, as it is not his own property. He has been entrusted to hold it safely until the watch is given to the grandchild.

To create and implement a trust effectively, you need to name a trustee who can carry out your intentions. If you can’t find one individual to serve that role, you may need to hire a corporate trustee to take on some or all of these duties and responsibilities. It’s a good idea to make sure the trustee understands the duties and responsibilities he or she will have before the role is finalized.

The starting point in determining the trustee’s duties is the trust agreement itself, which may specify what the trustee must do with trust assets. Beyond that, certain duties are imposed on the trustee by state law, such as:

Administer trust by the terms in the trust document. The trustee must read and understand the entire trust agreement and adhere strictly to the terms of the trust. If there is any ambiguity, or if the trust document is silent on an issue, the trustee may need to petition the court for instructions.

Duty of skill and care. In most states, the trustee must administer the trust with the care, skill, prudence, and diligence that a seasoned trustee would employ. Even if a person has no knowledge of what being a trustee entails, he or she will be held to the same standard, so it’s important to choose someone who is capable to act in that role.

Duty to invest. The trustee must invest trust assets, ensure proper asset allocation, and oversee an investment strategy based on the financial needs and risk tolerance of the beneficiaries, trust directives, and state law. Some states have adopted the “prudent investor rule.” This rule holds trustees to a high standard regarding investment decisions. A trustee who is not a professional investor may want to delegate investing to a wealth management professional or financial advisor.

Duty to account. Most states require the trustee to provide an accounting to beneficiaries showing assets, liabilities, receipts and disbursements of the trust. The format and frequency of this accounting may vary from state to state, so it’s important to understand the state laws which govern the trust when it comes to accounting and reporting standards.

Duty not to delegate. Aside from the typical trust provision that professional advisors such as attorneys, accountants and investment advisors may be hired, the trustee is responsible to perform most duties personally. Some states allow a trustee to delegate investment decisions to an investment advisor, but the trustee must still maintain supervision over the account. If a co- trustee is designated, duties may be shared between the two trustees.

Duty to give notice, furnish information, or communicate. Trustees have an obligation to communicate certain information to beneficiaries or others. The trustee may be required to notify beneficiaries when they are entitled to withdraw funds from the trust or when he or she is resigning. In discretionary trusts, the trustee must generally communicate with beneficiaries to determine a beneficiary’s needs and appropriate distributions.

Duty of impartiality. The trustee must treat the beneficiaries impartially, unless the trust provides otherwise. For example, if the trust has real estate holdings, the trustee should not allow one beneficiary to use trust property to the exclusion of others without charging rent or obtaining the approval of the other beneficiaries. The trustee also has a duty to avoid conflicts of interest.

In addition, the trustee must:

Not use trust property for personal gain, or any other purpose unconnected with the trust, even if there is no loss to the trust.

Keep trust property separate from personal property at all times.

Maintain confidentiality, keeping the terms of the trust and information regarding trust assets and its beneficiaries private.

Typically, a trust agreement includes a list of provisions, such as permissible investments; buying, selling, mortgaging and leasing of trust property; and the exercise of discretionary decisions; and other “administrative powers.” Trustee powers typically include:

Distributing trust assets. The trustee’s role is to make distributions to trust beneficiaries may take the form of discretionary distributions. For example, the trust may authorize distributions as required for the beneficiary’s “health, education, maintenance, and support.” The trust may further direct mandatory distributions at certain times. At some point, the trust will terminate and the trustee must then distribute the trust assets to the appropriate beneficiaries.

Records and accounting. The trustee should keep accurate records of all financial aspects of the trust, as well as communication to and from beneficiaries, agents, and co-trustees, if any. This documentation may include:

All requests, granted and denied, as well as the trustee’s rationale.

Trust actions, in order to provide accountings to trust beneficiaries.

General records, such as bank statements, trade confirmations, and filed tax returns.

Real estate tax and property insurance payments.

Compliance with tax laws. The trustee must comply with all relevant tax laws, including state and federal income tax, estate tax, and generation-skipping transfer tax laws. The trustee is responsible for filing income tax returns as well as payment of taxes.

Clearly, a good trustee must be a master of many disciplines. The financial, taxation, reporting and other duties may be a daunting set of responsibilities for one person. In some cases, it might be a good idea to choose a co-trustee or corporate trustee in addition to your primary trustee.

When selecting an individual trustee, consider the following qualities:

Responsible and reliable. Will the person be responsible in exercising the powers? Will he or she be reliable in dealing with trust assets and in administering the trust? These are essential qualities for a capable trustee.

Experience and expertise. Even if all good intentions are present, will the person understand the role as well as its obligations and duties, ranging from investing to reporting? Will he or she understand the potential personal liability in the role? It’s better to choose a trustee with these skills rather than just choosing someone who is a close family member.

Availability and communication ability. Having the time to devote to trust matters and being available to beneficiaries and co-trustees or corporate trustees are other important qualities.

When should you consider naming a corporate trustee?

Consider naming a corporate trustee if you don’t have an appropriate individual trustee. A corporate trustee can serve as your sole trustee, or as a co-trustee with a friend or family member. The benefits of naming a corporate trustee to serve as a co-trustee with a family member include:

Less stress for the individual trustee, so he or she can focus on the more personal issues of trust administration—fulfilling the grantor’s wishes and closely monitoring the needs of the beneficiaries.

Expanded expertise, since a corporate trustee should be well-versed in investing, tax compliance, and accounting. The corporate trustee can assure your individual trustee that all of the necessary duties and obligations are routinely met.

Choosing the right trustee requires thoughtful consideration of a number of issues. Be sure to consider all of the skills and duties required by a good trustee before making your selection.

The tax information herein is not intended to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties. Examples included herein, if any, are hypothetical and for illustrative purposes only.

Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor. TIAA-CREF also does not offer legal advice. Please see your personal legal advisor regarding your particular situation and the use of any information contained in this article.

Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value.

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The tax information herein is not intended to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties. Examples included herein, if any, are hypothetical and for illustrative purposes only.

Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor. TIAA-CREF also does not offer legal advice. Please see your personal legal advisor regarding your particular situation and the use of any information contained in this article.

Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value.